1 week ago
The Reserve Bank of India (RBI) on Monday introduced an operational framework allowing the reclassification of foreign portfolio investment (FPI) as foreign direct investment (FDI) if holdings exceed the prescribed threshold.
As per existing regulations, investments by an FPI and its investor group must not surpass 10% of an Indian company’s total paid-up equity on a fully diluted basis.
Should this limit be breached, the concerned FPI may either divest holdings or reclassify them as FDI, provided conditions set by the RBI and Securities and Exchange Board of India (SEBI) are met.
The divestment or reclassification must occur within five trading days from the settlement date of the trades that caused the breach.
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Foreign direct investment involves a firm or individual from one country investing directly in business operations or assets in another country. In contrast, foreign portfolio investment refers to investment in financial assets or securities, such as stocks or bonds, issued in a foreign country.
Under the new framework, the reclassification process requires government approval and the consent of the Indian investee company involved. The RBI clarified, however, that reclassification is not allowed in sectors where FDI is restricted.
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The entire investment must be reported as per the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.
Following this, the FPI should instruct its custodian to transfer the equity instruments from the demat account designated for portfolio investments to the FDI account. The framework takes effect immediately, the RBI added.
